Question:
Just because there is an exemption under the Income-tax law, is it presumed that a transfer of a capital asset was otherwise taxable?
Dissection:
Recently, in the Budget, it was proposed to amend section 47(iii) of the Income-tax Act, 1961 (“ITA”). The proposed amendment specifies that only gifts by individuals or Hindu Undivided Families (HUFs) would not be considered as a “transfer” for the purposes of section 47(iii). This amendment aims to address “corporate gifts,” where various judicial precedents had previously held that there is no requirement for “gifts” to involve natural love or affection under section 47(iii). Consequently, any transfer without consideration was eligible for an exemption under section 47(iii).
However, the question arises: even if section 47(iii) is amended, would corporate gifts of capital assets be subject to capital gains tax in the absence of any consideration received or accrued? There are certain imputation mechanisms under the ITA.
For example:
a) For the transfer of land or building, the reckoner value is deemed to be the full value of consideration if the consideration received or accrued is less than the reckoner value.
b) For the transfer of unlisted shares, the tax Fair Market Value (FMV) is deemed to be the full value of consideration if the consideration received or accrued is less than the FMV.
c) Where the consideration received or accrued is not determinable, the FMV of the assets given up is deemed to be the full value of consideration.
However, the key prerequisite for these imputation mechanisms to apply is that there must be some consideration that is “received or accrued.” In its absence, can the imputation mechanism apply at all? If not, and if no consideration is received or accrued, would a “corporate gift” still be subject to capital gains tax even after section 47(iii) is sought to be tightened? Wouldn’t the principles of the “real income” theory apply, thereby still exempting “corporate gifts” from capital gains tax?